What are two financing facts many storage owners are surprised to learn? One, there are more types of permanent, bridge and construction loans available today than at any time in the history of the industry; and two, lenders are more likely to add custom loan terms and features, even for permanent loans, if a facility has a positive track record or a new property has consistent lease-up.

Whether you are trying to fix your cost of capital for a newly or nearly stabilized property; obtain permanent financing to replace maturing, long-term debt; secure bridge financing to take out a construction loan or buy out an equity partner; or secure construction-loan funding for a development in a good market, its a great time to seek financing. However, its important to have an existing property with a positive history or a development site with a competitive advantage in a strong market to lock in the most competitively priced capital.

Permanent Loans

Many investors believe there is only a small price variation and minor differences in loan structure from one lender to the next for long-term, fixed-rate, permanent financing. The good news for owners is this is far from the truth in todays aggressive lending market. One reason for the pricing differential is there are still only a handful of capital providers who fully understand storage as a property type and have a track record of trading self-storage paper in the secondary market.

As most investors know, permanent loans are used to take out floating- rate construction or bridge loans, typically with long-term, fixed rates. The goal of the permanent loan is to secure sufficient proceeds to pay off the construction loan and return most or all of the original equity capital to the developer-owner and any investor partners. With fixed interest rates at 40-year historical lows, most investors are pushing to lock in their cost of capital, whether they are taking out a loan, coming out of an existing fixed-rate loan with a yield-maintenance or defeasance prepayment penalty, or purchasing a new facility.

At the writing of this article, it is possible to obtain five-, seven- or 10-year fixed rates in the 4.75 percent to 5.75 percent range at loan amounts up to 80 percent of value. If you are looking for a loan that is 65 percent loan-to-value or less, you can obtain a 10-year fixed rate in the low 5 percent range. Most of these loans are amortized over 25 or 30 years and funded by lenders who trade them as part of a billion-dollar portfolio in the commercial mortgage backed securities (CMBS) market.

The exception would be a life-insurance company, which usually cant match the same leverage and low cost of todays CMBS or conduit loans. It may, however, provide a shorter-term, fixed rate-loan with a declining prepayment-penalty schedule during the last several years of the term. The other exception is a local bank that will offer a fixed rate to a preferred customer; however, it is very rare that a local bank can compete on rate or loan proceeds with a CMBS fixed-rate loan.

In the past, it was the intent of many owners who secured long-term, fixed-rate loans to hold onto their properties over the long haul. This was because they knew the loans were essentially prohibited from prepayment due to the high cost of yield maintenance or defeasance. Also, at the time, rates in the 8 percent to 9 percent range were attractive compared to the double-digit rates previously available.

However, since we are most likely at the bottom of the interest-rate cycle, even owners who have a short-term investment horizon are placing long-term, fixed-rate loans on their properties. They either believe the prepayment penalty will be nominal at the time of payoff, or they want to lock in these low rates to make their properties more marketable. Owners who secured fixed interest in the 8 percent or 9 percent range years ago are looking to replace it a rate below 6 percent. Consequently, the defeasance or yield-maintenance calculations add up to an onerous prepayment penalty.

Recent trends in permanent financing include the ability to lock in all or the majority of loan proceeds for a facility that is still in its final stage of lease-up by working with a lender who will offer a customized loan structure. One example is bridging the shortfall of net operating income needed to qualify for the desired loan amount with a letter of credit.

Another example is structuring an earn out, whereby you fix the majority of loan proceeds today and earn out the balance by increasing net operating income over a six- to 12-month period. Furthermore, lenders are willing to offer leverage exceeding the normal 75 percent loan-to-value limit and 30-year amortization on a case-by-case basis.

Finally, it is important to understand that to qualify for low, fixed-rate loans, you must be able to satisfy requirements mandated by the secondary or CMBS market. specifically, you will need to form a Single-Purpose Entity as the ownership body of the property. This means you cannot own the property as an individual, and the entity you form cant be engaged in any other business than the operation of the facility.

Bridge Loans

The purpose of a bridge loan is to provide a relatively short term with little or no prepayment penalty, during which time an owner can maximize the income potential of a property before securing long-term, permanent financing. This may include an added-value purchase to increase occupancy and net operating income at a facility that has been poorly managed, or an expansion for an owner with the ability to increase revenue by adding net rentable square feet. A bridge loan may be used to provide stabilization of an asset with a maturing construction loan that has experienced a longer lease-up period. A lower-interest, nonrecourse bridge loan may also be used to replace a recourse construction loan with a higher floor interest rate.

Depending on a facilitys economic occupancy and corresponding debt-service coverage ratio (DSCR), bridge loans may be non-recourse, recourse or partially recourse. Most are priced over LIBOR, though some banks still base their loans over the Prime Rate. The LIBOR-based pricing for many bridge loans is in the 4-percent to 5.5-percent range, depending on the degree of leverage, the quality of the asset and the financial strength of the borrower.

The exception would be borrowers who qualify for bridge loans offered by national money-center banks. These institutions may provide a partial-recourse loan that burns off for properties that have reached or surpassed the breakeven DSCR. These bridge-loan rates are in the 3.5 percent to 5 percent range. Its important to note that if your bridge loan is nonrecourse, the nonrecourse applies to most everything except fraud, misrepresentation and environmental contamination.

Flexibility is a key aspect of a bridge loan. The borrowers exit strategy is to move into a permanent fixed-rate mortgage or sell the facility; therefore, the financing cant be constrained by a significant prepayment-penalty structure. Another potential feature of a bridge loan is the ability to negotiate an earn-out component to receive additional loan proceeds based on increasing the properties income. This may involve the expansion of anexisting facility or be as simple as increasing the occupancy and income through improved management.

Furthermore, the length and terms of bridge loans vary, and most of them have either no lock-out period or a very short one in which prepayment is restricted. If they have a prepayment penalty, it is relatively low and goes away in a short time. For example, some bridge programs are locked out to prepayment during the first year, a 1 percent penalty in the second year, and decline to no penalty in the final year.

A recent trend in self-storage bridge lending is the ability to fund loan proceeds equal to 100 percent of total project costs to facilitate the buy-out of a partner or an outright purchase from a third-party owner. One big difference between a bridge and a construction loan is if there has been enough seasoning at a property, the lender will offer significantly more loan proceeds equal to 75 percent of appraised value, as opposed to the 75 percent 80 percent of project-cost leverage restriction found in a typical construction loan.

Construction Loans

Construction loans are typically provided by money-center banks, strong regional banks or smaller local banks. This is true whether you are building a new facility from the ground up or expanding an existing one. It makes sense to call an experienced self-storage lender with whom you already have a working relationship, because it will likely offer the most aggressive loan terms, rate and structure. However, some borrowers will benefit from the services of an experienced mortgage banker or broker when it makes sense to build a new relationship, or they want to take advantage of a competitive bid process between multiple banks to ensure they secure the most aggressive loan possible.

The market is always changing. Some banks are extremely competitive during one quarter, only to exit the market the next quarter because they have reached their self-storage lending limit. This is why it makes sense to nurture multiple relationships. Once you have selected the bank that best meets your needs, its important to understand its underwriting criteria for the borrower and property to avoid misunderstandings during the loan process.

If you are starting a new banking relationship, understand that most banks will want to see experience successfully building and stabilizing self-storage properties. They will also want to review the results of a professional feasibility study. The most competitive construction lenders require full recourse or personal liability to the individual principals; therefore, they will scrutinize your personal financial statement to determine if you meet their net worth and liquidity requirements. The rare exception to this is when a financially strong borrower convinces a bank to accept recourse only to a specific entity, and then capitalizes the entity to a level that satisfies the bank.

Next, the bank will completely analyze your monthly construction, lease-up and operating pro forma, which will include your projections of rental income, economic occupancy, number of months to stabilization, expense ratios, etc. Your projections will be compared to the market, so you must make a strong case. Furthermore, your projected costs to build the facility will be compared to those of other facilities recently developed in the area.

Once you meet the banks lending criteria, you can secure a low interest rate, which can range from 3.5 percent to 5.5 percent for a loan that provides up to 75 percent or 80 percent of total project-cost financing. The range in interest rates is based on your developers financial statement, the type of bank interested in the project, your storage track record, the size of the loan request, the market demand for the facility, and the quality of the projects location.

If you have a net worth of approximately two times the loan amount and at least 10 percent to 20 percent of it is liquid, you might qualify for one of the money center banks financing programs. These institutions generally offer LIBOR- or Prime-based rates in the 3.5 percent to 4.75 percent range. That said, they have very different qualifying criteria. For example, some will not budgeoff their 10 percent to 20 percent liquidity requirement and will ask that you maintain that liquidity through the entire construction- loan period. Others will allow minimal liquidity as long as you have a strong track record of developing and stabilizing storage facilities and enjoy a significant annual cash flow from your portfolio.

If a money-center banks criteria are too stringent, one of the strong regional banks that offer the same LIBOR- and Prime-based rates but typically use floor interest rates in the 4.75 percent to 5.5 percent range can be a great source of capital. These loans usually provide for a three-year term with a one-year extension option; a two-year term with two six-month extension options; or similar terms and extension options.

There are some non-bank institutions that offer non-recourse or partial-recourse construction financing. These lenders are rare and are typically selective as to the types of deals they will fund. Because their only recourse is to the real estate, there must be strong market evidence to support the demand for your project. One attractive feature to this higher-cost construction financing is it may provide up to 85 percent loan-to-cost financing. Today, these lenders have floor interest rates in the 6 percent to 7.5 percent range. They may charge higher origination fees and/or exit fees and may include prepayment penalties in their loan structure.

Whether or not construction lenders require personal guarantees/recourse, their pricing is based over LIBOR and Prime, so your rate will most likely adjust during your loan term. It is important a developer factors in the impact a floating rate loan may have on his cash-flow projections and corresponding return on investment.

Recent construction-lending trends include the ability for money-center banks to offer an option with a significant net worth and liquidity, with the lowest LIBOR-based construction loans, to swap out their LIBOR-based, variable- rate financing for a fixed rate for 12 or 24 months. The cost to swap the rate varies, depending on what the interest-rate futures market believes will happen over the next couple of years. Another trend is for lenders who understand storage to offer longer construction- loan terms, like 36 months, to give facilities time to stabilize.

The good news is owners enjoy a wide variety of competitive financing options and are benefiting from some of the lowest interest rates in history. Todays variable-rate loans are priced over LIBOR or Prime, both of which are at historical lows. When lenders add their margins or spreads to these indices, it equates to variable-rate loans from the mid-3 percent to the mid-5 percent range. The fixed-rate lending market is just as favorable. Most fixed-rate loans are priced over U.S. Treasuries, also at historical lows. Add the additional spread to todays 10-Year Treasury, and its possible to obtain loans in the high 4 percent to the high 5 percent range for five, seven or 10 years.

Jim Davies and Eric Snyder are principals of Buchanan Storage Capital, which delivers debt and equity capital to the self-storage industry nationwide. For more information, call 800.675.1902; visit www.buchananstoragecapital.com.

It's easy to implement records storage lite along with small-business packages in self-storage without adding to your core employees. Nontraditional staffing is the key. What is this, and how does it add to service revenues without adding to overhead? There are four ways to staff any task or work activity: full-time employees, part-time employees, outsourced or contract staff, and temporary staff. Each has pros and cons.

• Full-time employees add to your general overhead and tend to cost the most in long-term expense dollars. In this era of doing more with less, you should have only a core of full-time employees who provide the focus for your primary business. Full-timers should be kept to the minimum since benefits, taxes, workers compensation, health insurance and vacation time are costly.
• Part-time employees are beneficial because they add value where you need it and do not require as much by way of benefits.
• Outsourced or contract staff may be the best way to staff projects and additional services.
• Temporary staff is by far the least optimum way to staffing, since they generally come with little or no skill. As a result, the need for training and supervision is increased.

Those who implement records storage lite in self-storage may find they can enhance their margins by using outsourced or contract labor to offer services that would ordinarily require full-time staff. These resources fall into several categories that are widely available in just about any marketplace.

Soccer Parents

There is a valuable supply of potential staff to be found in parents who stay at home to raise their children instead working full time. Most want to be home when the kids leave for school and back when they return in the afternoon. In many cases, they have highly prized training and education. It is not difficult to find former administrative assistants, paralegals, legal secretaries and others in your neighborhood. Generally, they like to work from 10 a.m. to 2 p.m., Monday through Friday. These people are ideal for taking new-account inventories, data entry, special projects and billing assistance.

Two Men and a Truck

Although there is an actual franchise by this name, what Im referring to is the small moving companies that are plentiful in most communities. They are typically made up of a couple of guys who have gone into business with very little capital and are bootstrap entrepreneurs. They may have nothing more than a truck, some moving equipment, a cell phone and two strong backs. They are willing to work hard for their money and are used to moving heavy materials.

Furthermore, they are looking for recurring revenue. You can offer this, since you will often be doing pick-ups for new clients. They can handle your moves on their slow days. Since most household moves occur on the weekends, this leaves the moving company several days each week to perform work for you. As you grow your business, they grow theirs.

Of course, they must follow your procedures and use your uniform. They must sign a contract that requires them to behave in certain ways and reflect the image you desire. In effect, they become invisible to your clients, meaning clients believe they are part of your organization. There will be more on the subcontracting agreement later. Small moving companies can be ideal subcontractors that can be used for new account and regular weekly pick-ups from existing clients.

Courier-Subcontractors

Rather than refer to outsourced or contract workers as couriers, I prefer to use the term courier-subcontractors. Couriers refers to delivery companies you generally find listed in the phone directory, many of which do not have their own vehicles. They usually contract out to independent drivers who own trucks. These subcontractors can work for multiple courier companies on the same day, so you can hire them directly rather than going through a third party.

The business model includes a parent company that handles sales and dispatching and subcontractors that make deliveries. The most common revenue split is 60/40. The actual delivery agent gets 60 percent and pays his own insurance, fuel and maintenance. The dispatcher receives 40 percent and owns the client relationship while connecting the courier-sub-contactor to the gig (specific pick-up or delivery engagement).

Subcontractor Agreements

If you choose to use this model for hiring employees, pay careful attention to detail when creating the agreement both parties will sign. You should have a contract with any subcontractor with whom you do business. The following are some rules of thumb:

1. Always have a written agreement signed and dated by both parties.
2. Specify written roles and responsibilities of the subcontractor.
3. Build measurement, benchmarks and expectations into the agreement.
4. Consider performance bonuses and penalties.
5. Have an exit strategy to release the subcontractor if he does not comply with your rules.
6. Develop a training program and materials for each subcontractor.
7. Ensure the subcontractor becomes invisible to your client. (He should look, dress and act like your own employees.) 8. Select only individuals you would consider hiring for your own staff.

The most important part of outsourcing and subcontracting labor is control. You should never give up management of the subcontractor, just as you would never give up management of an employee.

Regular columnist Cary McGovern, CRM, is the principal of FileMan Records Management, which offers full-service records-management assistance for commercial records storage startups, marketing assistance, and sales training in commercial records-management operations. For assistance in feasibility determination, operational implementation or marketing support, call 877.FILEMAN; e-mail [email protected]; www.fileman.com.

Todays competitive environment can be tough on those looking to buy self-storage properties. Many are eager to take advantage of low interest rates and the industrys bright future, though in some areas, viable facilities are few and far between. Employing a combination of resources can be the best solution:

Consult industry-specific listing services.

Contact real estate agents who specialize in self-storage.

Cold-call existing owners and operators to seek a sale.

Expend good old-fashioned shoe leather (visit sites and talk to owners).

One familiar rule of thumb in real estate is you will make one offer for every 10 properties you consider. If youre lucky, one of those offers will be countered or even accepted. Of course, the danger is that as capital pours in and cap rates continue to fall, frustrated buyers are tempted to place riskier bets on lower-quality stores. This enticement must be resisted at all costs. It is far better to demonstrate discipline than to rush into a dubious deal. Remember, in real estate, you make your money on the buy.

Keep a Cool Head

The sellers market is forcing us back to the basics. Today, more than ever, finding the right deal depends on doing your homework in an objective and dispassionate way. Sure, its exciting when you finally find a property you like and begin framing an offer. But this is not the time to let your judgment be clouded by a desire to close the deal. Instead, with your enthusiasm tightly leashed, maintain a laser-sharp focus on the fundamentals: current income and your estimated operating costs. Then focus on the following:

Purchase price

Closing costs and fees

Cost of improvements

Cost of financing

Cost of providing returns to investors

Evaluate these financials in great detail. Is your offer enough to make the deal work? Have you built in a cushion so you can continue paying your investors during difficult times?

Remember to remain unemotional. Avoid falling in love with any one property, no matter how much it may fi t your search image. When emotions become involved, the dangers go far beyond paying more than a facility is worth. They include such risks as purchasing a property with serious, even fundamental, flaws or rushing into a market that is already overbuilt.

The Dirty Details

You can avoid common mistakes by concentrating on frequently overlooked issues:

1. Deferred Maintenance

Dont ignore maintenance problems, such as outdated roofs and broken doors. Sooner or later, these items will have to be rectified, reducing your returns.

2. Property-Tax Increases

These can be triggered by the purchase of the property.

3. Yellow Pages Advertising

In certain markets, Yellow Pages ads can be very expensive. Check to make sure this expense is reflected accurately in the figures. Also make sure a facility has paid for its current advertising in full, as some sellers will have prepaid only a portion of their bill. The second and often considerably larger payment will become an unexpected expense for you down the road. Also ensure the ad hasnt been cancelled by the seller anticipating his exit. You may not realize you have lost this crucial advertising until the publication deadline has passed.

4. The Sellers Numbers

Never rely on figures provided by the seller. Review all the numbers you can get your hands on in exhaustive detail. You may discover, for example, that the owner/operator has never drawn a salary. This produces a payroll savings you will be unable to duplicate. If the seller assures you that youll be able to raise rents without difficulty, ask one simple question: If thats so, why havent you raised them already?

5. Due Diligence

Never consider closing on a property until you have conducted a thorough due-diligence effort. Once youve bought the property, its too late for second thoughts.

Concentrating on these and a thousand other issues will help you determine your target propertys ability to generate and sustain income. This objective perspective will be invaluable during negotiations with the seller and potential lenders. Best of all, it will help you meet your most important goalprotecting your investors.

In the months ahead, those searching for the right store will need all the patience they can muster. As you push ahead with your search, it may help to remember the ancient adage caveat emptor (let the buyer beware). Have you ever decided to pass on a property and later discovered youd made the right choice? Or have you experienced buyers remorse? Often, the best deals are those you walk away from with your checkbook unopened. Feel free to drop me a line and share how you may have made money on the buy.

Scott Duffy is the founder and principal of Self Storage Capital Group Inc., an emerging owner and operator of public self-storage facilities based in Santa Monica, Calif. Mr. Duffy is an entrepreneur and investor whose background includes more than 15 years of management experience with media and technology firms, including FOX Sports, CBS Sportsline and NBC Internet. He has also worked with bestselling authors and speakers Anthony Robbins and Jim Rohn, conducting workshops throughout the United States and Canada in sales training, customer service and personal development. For more information, e-mail [email protected].

Construction Corner is a Q&A column committed to answering reader-submitted questions regarding construction and development. Inquiries may be sent to [email protected] .

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Q: I am about to install a new keypad-access system at my gate and would like your opinion on adding intercoms at the same time. Are they worth the time and money?

Dale in Hemet, Calif.

A: Amazingly, intercom systems are pretty inexpensive, especially when you install them at the same time as new keypads. I recommend using them. From an installation standpoint, it involves just another wire per keypad. From an end-users perspective, it shows you want to stay in contact with customers. Often, having an intercom at a gate keypad will save a tenant from having to get out of his car to go in the office. This is appreciated, especially in inclement weather. It also allows the manager to communicate with a tenant without leaving the office.

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Q: I am in the process of building my first facility and am at the point where I need to decide whether to install an exit keypad or just use a ground loop. Which do you prefer and why?

Julio in Beaumont, Texas

A: I recommend the exit keypad for a few reasons. First and foremost is site control. Without an exit keypad, you have no idea how long a tenant stayed on site or when he left. Another reason is it allows you to control tailgating. If someone (tenant or otherwise) was to follow a tenant into the facility, it would be harder for him to get out with a properly configured exit keypad. Finally, if your site is going to have any type of door-alarm system, the exit keypad will be used to re-arm a tenants unit when he leaves the site.

Tony Gardner is a licensed contractor and installation manager for QuikStor, a provider of self-storage security and software since 1987. For more information, visit www.quikstor.com.

Many first-time self-storage developers assume a construction loan is similar to permanent financing. But approaching financing from this perspective may create long-term negative consequences. Construction and development financing is radically different from other credit facilities. It is approached uniquely from all four of these perspectives: 1) lender, 2) borrower, 3) risk analysis and 4) underwriting. If the lender is inexperienced in self-storage lending, he may not fully understand the idiosyncrasies of the product type and make mistakes based on unfamiliarity.

The Greatest Mistake

Many a borrower and lender have made the mistake of structuring their construction loan in a way that would be acceptable for other real estate types, meaning as a typical two-year, interest-only loan. On the surface, this works great. It only takes six to eight months to build a project, so it would seem two years should be ample time. But consider the following timeline:

1. If all goes well and construction starts near to the close of the loan, this assumes permits are in hand.

2. In a typical project of 50,000 square feet, this assumes a gain of 1,875 to 2,500 square feet per month, which likely means renting 2,000 to 2,750 feet per month (pessimistic and optimistic, respectively).

3. Most permanent-loan lenders want to see six months to a year of seasoned cash flows to feel comfortable with the debt-service coverage. Keep in mind the higher the DSC, the greater the opportunity for the borrower to negotiate a better rate.

Most banks do not make construction loans for longer than a year, and only a few go to two years. What do you do? Look for a construction lender that will grant a hybrid of the construction and short-term permanent loans. The mini-perm is becoming more popular with banks and construction leaders. It is typically 12 to 18 months of interest- only, pure construction loan. After the interest-only portion, the loan adjusts every six months, increasing in amortization as the cash flows support higher debt-service coverage (DSC). Here is an example of a well-negotiated, win-win mini-perm loan:

This will provide the borrower proven cash flows with at least 1.40 DSC (target) and that are seasoned for at least one year above 1.25 DSC (minimum). If necessary, a six-month extension (or two) should be negotiated. Expect to pay two points on the front end for this loan, and a point for each six-month extension.

Some banks will require full personal guarantees for the entire mini-perm loan term. Strong borrowers may be able to negotiate a burn-off of recourse as the cash flows mature. This loan provides the lender (bank) with an assurance the project is able to sustain itself and the borrower could refinance at 1.25 DSC.

Negotiating the Best Loan

Your feasibility-study consultant should be able to assist you in the loan-negotiation process. Assuming he determines the project is strong and the cash-flow pro formas and budgets support the DSC, he can provide the bank with breakeven-analysis and sensitivity reports that will help it feel comfortable with loan terms most favorable to the borrower.

Your feasibility study should include a loan request with all the salient loan data the bank will be looking for, including important ratios and even your tax returns and financial statements. A good consultant will have referrals to lenders who are accustomed to underwriting permanent loans for self-storage. He may or may not have suggestions for construction lenders, as the construction loan is typically a relationship loan, which means the borrower is likely to already have some credit facility with the lender.

Since a construction loan does not have the strength of the collateral (a project that fails to complete construction is worth significantly less that a finished product), the lender must rely more heavily on the strength of the borrower. The borrower should have development expertise and experience, or the lender will substitute borrowing experience or equity. He should also be able to demonstrate self-storage experience, especially if the lender is sophisticated. A novice self-storage lender may not understand how critical strong management skills are during lease-up. Many banks incorrectly assume a proven track record in real estate means the borrower will be successful in the selfstorage endeavor.

The three Esexperience, expertise and educationcan almost always be substituted with financial strength. The lender will often look to the three Cscredit history, character and cashto supplement a weak experience factor.

Getting Started

Self-storage construction loans are a unique product for many lenders. You should prepare for you initial meeting. Prior to face time with the bank or construction lender, ask the following questions:

1. Do you make self-storage mini-perm loans?

2. Is the projects location within the lending footprint of the bank?

3. Is the loan size within the limitations of the bank or will it require a participant?

4. If the bank requires a participant, does it have one for a selfstorage loan?

5. Have you ever made a self-storage loan?

If the answer to these questions is yes, set up an appointment to meet. If the answer to No. 5 is no, you will want to know more about how the approval process is going to work. A negative response in this case can actually work in your favor if you have a weak or marginal project.

RK Kliebenstein, president of Coast-to-Coast Storage, is a former commercial lender and provides feasibility studies and financial consulting to self-storage developers. He can be reached at 877.622.5508, ext. 81.

A guy decided to go on a diet and announced it to his friend, who was happy to hear it and in full support of the idea. After a month, they bumped into each other in the mall. The friend asked how the diet was going. The guy responded, Really good. I feel a lot thinner these days. Perplexed, the friend asked, Thats interesting that you feel thinner, but how much weight have you lost? The response: Oh, Im afraid to get on the scale!

Many storage operators are afraid to get on the marketing scale. Theyre scared to measure the results of their efforts for fear of what they may or may not find. But they should realize you can only make good decisions if you have good data! To get good data, you have to track your numbers.

In the storage industry, there are some key facts to follow. Keep your eyes on them, and you will always be able to adjust your marketing efforts to ensure the greatest success. There are three important elements to making this work. First, you have to know which numbers to track. Then you have to know how to track them. Finally, you have to know what do to move the numbers in the right direction.

All of these figures are best evaluated on a monthly basis. A weeks worth of data would be too little and anything from longer than a month wouldnt allow you to make adjustments quickly enough. In this Internet age, you also have two sets of figures to track: your offline and online numbers. As an operator, youve got to fire your guns with both barrels. Neglecting either of these will put you at a competitive disadvantage.

Offline Numbers

1. How many calls do you get?

Whether you track this number manually or using a sophisticated phone system, you need to know how many calls you get each month. Since most of your marketing efforts are geared toward getting people to pick up the phone and call you, this is an essential element. If the phone isnt ringing, your marketing efforts arent working. A phone call normally precedes a rental. If youre in a high-traffic location, youll probably get a lot more people who just walk in without calling fi rst, but even then a phone that isnt ringing spells trouble.

2. How many of those calls result in visitors to your facility?

The percentage of people you convince to visit your facility lets you know how effective your phone skills are. If you cant get prospects to come to the store, you need to work on your phone-sales technique. If your closing ratio is below 50 percent, you have a problem.

3. How many of those visitors rent a unit?

The percentage of people who rent from you after a visit shows how good your sales skills are on a face-to-face basis. If prospects have made the effort to visit you, chances are good they will rent a unit. In fact, on average, more than 90 percent of visitors will buy. If your percentage is less than 90, you need to work on in-person sales.

4. How many referrals do you receive each month?

How many times each month do elated customers give you a list of prospects for your manager to call? Lets admit it, this is wishful thinking, but referrals are critical to success. Why? Aside from repeat customers, they represent the cheapest form of marketing.

You need to do everything you can to encourage referrals. In addition to the obvious task of treating customers extremely well, you also need to let them know you want referrals. Ask for them, and make sure to thank tenants when they give them to you. You may also want to provide incentives for those who refer.

5. What is the average length of stay of each customer?

This has a huge impact on profitability. If you can get existing renters to stay a few months longer than average, it will dramatically increase your revenues and you wont have to spend nearly as much on finding new customers. Treating people right and making their storage experience pleasant and enjoyable will help extend the average persons tenancy. Many will stay longer than they need to because youve made it comfortable and easy to do so.

6. How happy are people with their experience at your facility?

Numbers in this area tell you whether youre giving customers the service they expect. Provide lousy service, and it will come back to bite you. Everyone knows and preaches that service is important. The problem is few have a quantifiable method to let them know where they stand.

Ideally, your customers should be surveyed by phone. Given that this is extremely expensive, however, consider at least having a postcard people can fill out when they visit or move out of your facility. Keep it short, with a maximum of five questions that ask them to rate your site and service on a 1-to-5 scale. This is not an extremely sophisticated tracking tool, but it will give you an indication of where you stand and which way the numbers lean.

Online Numbers

1. How many unique visitors hit your website each month?

Unique, or new, visitors represent the true numbers as they relate to your site. If someone hits your site on 10 occasions, he should not be counted every time.

Talk to your webmaster to make sure you can separate new visitors from repeats. The numbers are there, its just a matter of extracting the data. This is similar to tracking the number of calls you get offlineits the key indicator of how good your marketing efforts are.

2. How many of those people request information?

Just like a properly handled phone presentation, your website should convince visitors to take a specific action. The three desired responses from web prospects are that they 1) request information, 2) call you on the phone or 3) visit your facility. Keep track of each of these actions to evaluate the quality of your online marketing.

3. How many of those prospects become customers?

You want your website to incite prospects to action. You want the benefits and features of your facility to inspire them to rent. Again, if you can get people to visit you, nine times out of 10 they will rent a unit. Remember to always ask prospects where they heard about you, whether it be a Yellow Pages ad, a referral from a friend or an Internet search. Tracking where your renters come from is crucial to spending your marketing dollars in the right places.

I have only one sign up in my office. It reads, Measurement Eliminates Argument. There can always be discussion on how to improve the numbers in your business. There should never be a question of what the numbers are. Track the figures mentioned above and youll be able to make the most intelligent decisions regarding the marketing of your storage facility.

Fred Gleeck is a self-storage consultant who helps owners/operators during all phases of the business, from the feasibility study to the creation of an ongoing marketing plan. He is the author of

Secrets of Self Storage Marketing SuccessRevealed!, available for purchase at www.selfstoragesuccess.com. He is also the producer of professional training videos on self-storage marketing. To receive a copy of his Seven-Day Self-Storage Marketing Course and storage marketing tips, send an e-mail to [email protected]. For more information, call 800.FGLEECK; e-mail [email protected].

Have you ever measured the incoming phone calls your store misses? What about walk-in customers? What impact do these have on your bottom line and potential real estate value? It would probably shock you to know just how powerful this information can be. How do you improve your selfstorage rentals and enhance the worth of your property? Sales training.

As the industry becomes more competitive, it is crucial to develop an ongoing training program that will continually improve the performance of your salespeople. It would be a shot in the dark to implement sporadic training out of fear of failure. This would be a waste of time, energy and money, and could even be detrimental to employees performance. If you dont feel comfortable conducting your own staff instruction, consider using a professional company that specializes in training to help you identify areas for improvement within your organization. It can provide direction on a regimented sales program to continually improve the skills of your entire team.

Success in the area of sales is a long-term journey. It involves doing things well and consistently, day in and day out. Accomplishment occurs along the way. If you think you have arrived, be carefulthis is about the time you become complacent, and the competition passes you by. If you have found the magic recipe for a highly effective sales program, good for you. It will take you to higher levels of success and guard your operation from competition as the industry continues to grow.

First Things First

The new generation of self-storage has become more sophisticated in the appearance of its stores, but it has lagged in the understanding and development of more effective training programs. Operators should perceive their facilities as retail operations, educating and building value with customers and earning the right to make the sale. This means guiding employees in the process of enticing and serving prospects.

The first key area to examine is your phone-sales presentation. In most cases, this is the initial interaction between your facility and the customer. It will dictate the overall impression a prospect has of your store and determine if he visits you. Industry statistics tell us that 90 percent of the time, if a customer actually visits a store, he will rent a unit. This reinforces and validates the importance of phone sales. Training in this field can make a significant difference in the opportunities you are given to earn new business.

Ongoing Efforts

Once you provide proper training for your employees, you must have a system to continually update that guidance. The initial training is only as good as its ongoing reinforcement. If you hire a training company, it can help you develop systems for continuing improvement. For example, having a trainer come in a couple of times each year will help you provide new information and ways to incorporate suggested improvements into daily work routines. It will also provide a basis from which to work in terms of raising the standards of acceptable performance. Keeping people on the learning curve also enriches their job responsibilities and creates better morale within the organization.

Another method for reinforcing training is a mystery-shopping service, which can act as a measuring stick and pinpoint areas for improvement in the sales presentation. If youre going to use this service, it is critical for everyone involved in the selling effort to be shopped consistently. This will raise the overall level of performance, as it involves employees in their own evaluation process. Use a mystery-shopping service that specializes in self-storage, as it can better customize the procedure and provide individualized coaching when necessary.

To take your storage operation to the next level, understand the importance of the sales program. The telephone is one of the most powerful tools you have. If used to its greatest advantage, it can set you apart from the competition. Budget for the ongoing training and development of your people, and you will set your facilities for success as the industry evolves.

Brad North is founder of Advantage Business Consulting, which specializes in on-site sales, marketing, feasibility and operational training for the self-storage industry. He has produced two live videos and a workbook titled Maximizing Your Sales and Marketing Program, which can help managers improve their sales and marketing efforts. He most recently launched A TelePro, a mystery-shopping service that assists in educating, evaluating and improving the phone-sales performance of self-storage professionals. For more information, call 513.229.0400 or visit www.advantagebusinessconsulting.com.

Regardless of the weather, the pool is openthe conduit-financing pool, that is. More commercial real estate borrowers are diving into the opportunities offered by conduit financing. With its proven structures and acceptance by the investment community, conduit financing has created a wave of powerful results for borrowers in the form of better terms, more aggressive proceeds and lower interest rates.

This article examines the process involved in pooling conduit loans and turning them into commercial mortgage backed securities (CMBS), with a focus on the role of the rating agency. You will learn about the risks and rewards of CMBS and be in a better position to analyze these financing options for your property. You will also discover the creation of CMBS only begins with the funding of a conduit loan.

Getting Into the Pool

The process of creating a CMBS transaction occurs after the origination of the loan(s) and is seamless to the borrower. Unlike local or regional banks that generally originate individual loans, conduit lenders originate loans for the express purpose of packaging them with other commercial loans of various sizes, property types and locations. Their goal is to ultimately sell the pool of loans as bonds.

To minimize the interest-rate risk associated with having loans on their balance sheet, a CMBS issuer will hold the newly originated conduit loans in its warehouse for only a few months, and will frequently work with other issuers to rapidly achieve the amount of loan collateral necessary to form a pool. On achieving the necessary critical mass, the issuer will transfer ownership of these loans to a legal trust through the use of a unique tax entity known as the Real Estate Mortgage Investment Conduit (REMIC).

As defined by the Tax Reform Act of 1986, REMICs can hold loans secured by real property without specific regulatory, accounting and economic obstacles. Without being taxed at the entity level, REMICs can distribute the cash flow from these loans to bondholders through the issuance of securities. This passive structure is designed to collect principal and interest payments of the pooled mortgages and redistribute proceeds to bondholders.

In the REMIC procedure, the sum of the mortgage pools principal and interest payments (the income stream) are sold as securities. By selling these securitieswhich have been heavily scrutinized and purposefully structured into specific risk classesa market is created to efficiently distribute, price and quantify the risk associated with commercial real estate loans.

CMBS bonds are sold to institutional investors such as pension funds, insurance companies and even banks that originate these types of mortgages themselves. Once the loans are pooled and transformed into risk-adjusted classes of securities, investors view the financial instruments and their expected yield more like bonds than real estate loans.

The end result of this process is a very efficient cost of capital and liquid distribution mechanism for the loan originators. These efficiencies are ultimately returned to the borrower in the form of cheaper capital with better terms than whole loans, albeit with certain restrictions. This is why a property owner should conceptually understand CMBS before diving in.

What are Rating Agencies and What do They do?

Before CMBS transactions are created, there are several steps that must be taken for the newly created securities to be marketed to the investment community. SEC requirements mandate that all public securities must be rated by designated groups that have obtained status as Nationally Recognized Statistical Rating Organizations (NRSRO), better known as the rating agencies.

There are currently four companies in the United States with approved NRSRO designation: Dominion Bond Rating Service, Fitch Ratings, Moodys Investor Service, and Standard & Poors. The rating agencies are a major part of the process of creating new issuance CMBS, and they have a significant influence on CMBS structure and pricing.

Rating agencies examine the aggregate pool of collateral contained in a proposed CMBS issuance and assign risk ratings and subordination levels to the bonds. They rate the bonds from highest to lowest, and according to their loss priority. The ratings assigned to the pool determine its composition and pricing structure, which is then used by the marketing agents to sell the bonds to institutional investors.

Once the rating agencies have assigned ratings to the CMBS issuance, the investors who buy these bonds select their purchases based on the level of credit risk and the yield they desirethe higher the risk, the higher the return. So what are the risks associated with buying CMBS, and how are they quantified by the rating agencies? A more thorough understanding of the ratings process and the structure of a CMBS transaction will help answer that question.

Loan-Level Analysis: Quantitative and Qualitative

Typically, rating agencies will not examine the entire pool of assets, but rather a representative sample, usually 60 percent to 70 percent of the mortgage pool. The sample is purposely chosen to provide the agency with a representative subset of loans by property type, location and balance for each contributor to the transaction.

In conducting quantitative analysis, the agencies re-underwrite the sample to determine an independent estimate of net cash flow for each loan. To accomplish this, each applies its own internal underwriting benchmarks to ensure appropriate credit standards are being met based on its criteria as well as other industry standards.

First, an agency scrutinizes the originators cash-flow projection to ensure underwritten revenue is based on market rents and is not overly aggressive when compared to historical property operations. It also ensures projected expenses and expense ratios are in line with market, historical and actual expenses. The agency then compares net cash flow for a given loan to the originators number to determine if a significant level of variance exists. It will compare the level of variance on the sampled assets by property type and may later haircut the originators cash flow on nonsampled loans within the pool.

Besides cash flow, agencies look at other quantitative loan factors and key indicators, such as loan-to-value ratios, debt-service coverage ratios (DSCR) and borrowers financial strength. In addition, they review all third-party reports used by the originator in making the loan to ensure no exception items are contained. These reports include, but are not limited to, the commercial appraisal, the environmental site assessment and property-condition reports. Additionally, the agencies apply a stabilized market capitalization rate to the adjusted net cash flow to make an independent determination of value.

It is also likely each agency will use its adjusted net cash flow and employ the use of a standardized loan constant (rather than the actual loan constant) to size the loan and determine stressed DSCRs, both at loan origination and the end of the term. A loan constant represents the percentage ratio between the annual debt service and the loan principal (annual debt service divided by the beginning loan balance equals the loan constant). The rationale for this analysis is to size the loan based on normalized interest rates, since interest rates fluctuate greatly over time.

For example, given the same net cash flow, a loan made on an 8 percent interest rate will have a substantially lower DSCR than the same loan made on a 5.5 percent rate. The use of a standardized stress constant allows the analyst and investment community to compare the loan on a relative basis to similar loans made over time. This benchmark analysis ensures debt will be able to refinance in a higher interest-rate environment.

Qualitative factors reviewed by agencies include items such as property location, market, property competition, borrower experience, property age and many others. The rating agencies also conduct physical site inspections of the sampled assets, focusing on the quality and competitiveness of the property in its market, as well as vacant land and new construction that may have a long-term impact on the subject propertys operation.

Structure and Ratings

The CMBS transactions monetary distribution generally follows a sequential payment structure commonly referred to as a waterfall. Each month, the entire sum of all principal and interest received by the trust is collected and redistributed to the bondholders, according to the predefined payment priority. specifically, those investors holding the highest rated bonds (typically AAA) are repaid first and receive principal and interest payments at a priority over lower-rated bonds.

In a typical sequential payment structure, all AAA-rated securities must be repaid in full before any lower-rated bond receives a principal payment. Once all of the accrued interest and principal on the highest-rated bonds have been repaid, principal payments start flowing to the next highest bond holders. This continues in sequence until all of the tranches are repaid, hence the waterfall analogy.

In the event of a default and an associated loss in the underlying mortgage(s), it is likely that there will be a shortfall of principal returned to the structure. In this case, the lowest- rated (or unrated) bond will suffer a loss. If the pool has many losses, the investments of the lowest-rated bondholders will continue to erode. If the losses are significant enough, the entire class of securities may eventually be eliminated, in which case the losses would start to erode the next lowest-rated class. In other words, investment returns are awarded from the top down, and losses are assigned from the bottom up.

Pool Analysis

After completing the loan-level analysis on the pool of assets, the rating agencies conduct a pool-wide analysis to assign subordination levels and determine the ratings allocation for the CMBS issuance. Assigning subordination levels is a complicated process in which the pool of loans is modeled and structured into specific classes of securities, and the risk of credit loss is disproportionately distributed among those classes. The end result is a credit-enhanced, senior-subordinated structure whereby the different classes of bonds carry different risk ratings and repayment terms. To reiterate, the return of principal is typically distributed top down, and losses are allocated bottom up.

The subordination (credit support) for a given class of bonds largely depends on how well protected a particular security is against the anticipated default loss. In general, the lower the credit qualities of the underlying mortgages that comprise the pool, the higher the required levels of credit support at equivalent credit-rating levels. Each of the four major agencies has a different procedure for determining subordination levels, but their end goals are similar as they attempt to model and estimate the credit loss that will potentially occur in the pool over the life of the bonds.

Final ProductRatings and Presale Report

Once all of the analysis is complete and the rating agencies have assigned their respective subordination levels to the pool, they prepare and distribute a document to the investment community known as a presale report. This is a comprehensive document that presents the results of the agencies analysis. Among other things, it will:

• Present the pools composition by property type and geographical dispersion of the collateral.
• Offer a thorough analysis and write up of the pools largest assets by loan balance.
• Disclose any areas of concern or other factors discovered by the agency in conducting its pool analysis.
• Disclose the subordination levels and risk rating assigned to the CMBS, which will be used in the sale of the bonds.

Self-Storage Gets a Lane and Competes Well

CMBS pools contain all types of commercial real estate assets, including industrial, retail, multifamily, office, hotels, manufactured housing, healthcare and self-storage properties. Traditionally, the debt-service coverage stress levels, standardized loan constants and standardized cap rates used for self-storage loans have been more stringent than those applied to other property types.

Self-storage loans tend to have smaller balances compared to other assets, which may mean they are not as well researched and understood by lenders and the investment community. Since a lender does not know which loans are going to be scrutinized by the rating agencies, they underwrite and price self-storage loans in a range they believe will pass the agencies stress levels and internal guidelines and still allow him to make money on execution of the loan sale.

Self-storage loans generally comprise less than 3 percent of the total pool being securitized. According to Citigroup Global Markets, of the total universe of securitized loans, which currently totals around $302.9 billion, self-storage comprises a meager 1.6 percent, or $4.84 billion. Even more astounding is the fact securitized self-storage loans have historically had the lowest overall default rate of all property types: 0.57 percent compared to the average CMBS default rate of 2.4 percent (Rohit Srivastava, MIT Center for Real Estate). Some think this is attributable to the fact self-storage properties have been held to harsher standards than other property types. Proponents believe self-storage properties have historically been over-stressed due to the lack of empirical data available to support the industry.

Regardless, because of its excellent track record, conduit originators have taken note, and self-storage is becoming one of the more favorably priced property types. More than ever, lenders are pushing the stress levels on self-storage loans to new limits with cautious optimism and the hope they will not be negatively affected when the loans are scrutinized. Rating agencies and investors have also demonstrated willingness to listen to the selfstorage story and better understand the nuances of the industry.

CMBS Borrowers Awash in benefits

Over the past decade, CMBS have accounted for an estimated $60 billion annually, and consistently account for a significant component of the commercial real estate debt market. Securitized mortgages constitute the fastest growing category of commercial loans, increasing $15.6 billion in 2003 from the previous year.

The proliferation of the CMBS industry and conduit financing has taken commercial real estate financing to a new level. It has positively affected the capital markets by bringing increased liquidity to lenders and decreasing risk to investors of real estate mortgage debt. They are no longer forced to invest in whole loans, which carry concentrated risk.

CMBS subordination levels have also decreased dramatically in the past 10 years, leading to market entry and fierce competition among originators for conduit-loancollateral. In 1996, average subordination levels for investment-grade bonds BBB or higher was greater than 15 percent. This means a CMBS pool of $100 million dollars was tranched into roughly $85 million of investment-grade bonds and $15 million of below-investment-grade bonds. Today, deals are coming to market at investment-grade subordination levels of 5 percent or less, meaning that of that same $100 million dollar pool, $95 million is investment-grade collateral.

Keep in mind the inverse relationship between risk level and return: the higher-rated (low-risk) classes have lower coupons, and the lower-rated (high-risk) classes have higher coupons. As subordination levels have decreased over time, so too has loan pricing, which is a major benefit for self-storage owners who borrow conduit money. The reasons for these decreases are many, but the main driver is the positive historical CMBS performance.

The CMBS industry is evolving into a major source of financing for commercial real estate property owners, including those in selfstorage. The process of securitizing mortgages into bonds is self-policing and has inherent efficiencies that have been proven as the industry has evolved.

Conduit mortgages are a more practical and viable alternative than even before. As we head toward a potentially rising interest-rate environment, these loans may very well provide the ideal financing terms for self-storage borrowers who wish to finance properties at low rates for an extended period of time. Given these market conditions, expect more owners to jump into the conduit-financing pool and enjoy its benefits in the near future.

Neal Gussis is a principal and Shawn Hill is a vice president at Beacon Realty Capital Inc., a mortgage-banking firm that arranges financing for all types of commercial real estate and specializes in self-storage nationwide. For more information, call 310. 207.0060; visit www.beaconrealtycapital.com.

If youre thinking about refinancing your existing self-storage loan, you should be asking these questions:

• When is the right time to refinance?
• I have a floating-rate loan. Should I switch to a fixed rate?
• Are there new loan products to consider?
• I have a prepayment penalty. Should I wait until the end of my current term to refinance?
• What will it cost to refinance?
• How can I optimize the process of refinancing by learning from others mistakes?

Knowing what to look for and what to expect will help you to manage the expense category that is generally the largest monthly cash outflow a self-storage owner has: debt service (interest and principle payments). As you think about the refinancing process, some of the key elements to consider are timing, product variety, prepayment penalties, and rates, terms and costs.

Timing

Making the decision to refinance is not always easy. A due construction or permanent loan will definitely set off this event. However, when reviewing some of the other triggers, you will find more than a few require considerable thought:

• Construction loan due
• Permanent loan due
• Need expansion funds
• Remove recourse
• Desire to pull out trapped equity
• Improve cash-on-cash return
• Interest rates low or expected to increase

Many self-storage owners do not realize they may have a considerable amount of trapped equity tied up in their business. Values for self-storage have increased significantly over the past few years, providing owners the opportunity to pull hundreds of thousands of dollars out of their operations. Selling your facility will free this trapped equity, but refinancing to the maximum loan-to-value will have a similar effect. Pulling this equity out through refinancing may also have some significant tax advantages.

Another reason some owners refinance their business is to increase their cash-on-cash return. Also called return on invested capital or the equity dividend rate, it measures the annual return you make (cash flow) in relation to the cash invested (or current equity). One way to increase this figure is through refinancing. The higher the cash flow and the lower the cash invested, the higher your return will be. In other words, the more of a lenders money you can use to finance your facility, the higher your cash-on-cash return.

Another trigger that may come into play is the opportunity to lock in a low interest rate. This has been particularly relevant over the last few months, as rates have started to move up from historical lows. Borrowers with floating-rate loans, such as those tied to the Prime Rate, are especially vulnerable to higher interest expense. A variable-rate loan may be right for you if you plan on paying it off in the next few years. But as the general consensus is short-and long-term rates are headed up, the timing may be right to refinance with a fixed-rate loan.

Loan-Product Variety

What used to be a relatively small list of loan products from which a self-storage owner could choose has branched into many alternatives. This is good from a borrowers perspective, but finding and selecting the right product to fi ts your needs can be difficult. To give you an idea of the many loan features available, here is a partial list:

• Fixed and floating interest rates, with loan terms of three, five, seven, 10, 15 and 20 years
• Amortization periods up to 30 years
• Interest-only for x number of months
• Multiple prepayment-penalty options
• Fixed fees and closing costs
• Early rate-lock options
• Recourse and nonrecourse
• Low-cost, variable-rate bonds Many of these features can be combined.

For example, a borrower could select a fixed-rate, 15-year loan with a 25-year amortization period and interest-only for the first 24 months. There are many other options.

Prepayment Penalties

Most long-term loans (longer than five years) taken out over the past seven to 10 years have some form of prepayment penalty. Just because there is a penalty, however, does not mean you cant refinance. It does mean you should perform a cost vs. benefit analysis before proceeding. It is always worthwhile to do a cost vs. benefit analysis when interest rates are low and values are high; interest rates are high and values are high; or there are other cash needs. It is generally not worth doing an analysis when interest rates are low and values are low; or interest rates are high and values are low.

When preparing for a refinance, become familiar with the following types of penalties. While there is probably some debate over which is the worst (pick your poison), this list presents them in sequence of what is considered to be most favorable to least favorable:

• Step-down
• Flat-fee
• Yield-maintenance
• Defeasance
• Lock-out

While there isnt space in this article to adequately cover each of the penalty types, it is important to match your needs to the alternatives. You should also be aware there is generally a cost, in terms of higher interest rates, associated with the most favorable prepayment clauses. Dont let a prepayment penalty prevent you from taking advantage of the benefits of a new loan or from pulling out needed trapped equity. Do the analysis or get someone to assist you.

Interest Rates, Terms and Cost

There are a lot of variables to weigh in a refinancing transaction. Many affect the interest rates, terms and cost of a loan. The following will give you an idea of these variables for a long-term, nonrecourse loan:

• Net operating income (NOI)
• Ability to cover debt service
• Requested loan-to-value (LTV)
• Percent occupancy (physical and economic)
• Loan amount
• Roof tops/population (in a 15-mile radius)
• Size (rentable square feet)
• Competition (in 5-mile radius)
• Quality of construction/age of facility
• Ratio of climate-control units
• Market occupancy
• Visibility/drive-by traffic
• Credit worthiness of borrowers
• Rental rates and rental-rate trends
• Barriers to entry in market
• Existence of outside professional management
• Deferred maintenance
• Quality of record keeping

For the most part, the first 10 or so variables are the most important and will have the largest impact on a borrowers ability to obtain nonrecourse financing at favorable interest rates and terms. If you are an experienced self-storage operator, you can imagine how a lender might look at each of these items. Following is how some of these variables would look in an ideal refinancing borrower profile:

• NOI coverage of debt service at 1.30:1
• LTV of 75 percent or less
• Occupancy at 80 percent or higher
• Loan size above $2 million
• Population of 100,000-plus in 15-mile radius
• 40,000 or more rentable square feet
• High-quality buildings, security, etc.
• Good personal credit rating

Even if your profile doesnt look like this, you can still refinance your current loan. You just may not get the best terms and interest rates. For a recourse loan, the ideal borrower profile would be focused more on the credit worthiness and self-storage experience of the borrower.

Terms for a nonrecourse refinancing will vary, based on where the borrowers business falls on the above variables. The following table provides an idea of the range you might expect for a 5-year, fixed-rate and 10-year, fixed-rate nonrecourse loan. Again, depending on the individual circumstances, the interest-rate spread (percent over the Treasury index) could be more or less.

Refinancing your self-storage loan does not have to be expensive. Generally speaking, you should plan for between 1.5 percent and 2.0 percent of the loan amount for your overall costs. There are loan programs that will help control these costs by offering fixed fees. These programs usually apply to loans in the $500,000 to $4 million range.

Common Borrower Mistakes

The refinancing process does not have to be complicated or stressful. One way to ensure a smooth process is to learn from others mistakes. Following are some common mistakes to consider before you start.

1. Not considering all available loan products.

The natural tendency for a borrower when it is time to refinance is to use the same loan product from the same source as used in the original loan. By doing so, he may miss an opportunity to find a new product that may be less expensive or better fit his needs. For example, if you typically roll over your bank loan at the lenders maximum term for a fixed rate, generally five years, you may not realize 15-year fixed rate loans are available, often at similar rates.

2. Using an inexperienced attorney.

Using an inexperienced attorney to close your commercial real estate loan could cost you considerable time and money. You should select your attorney based on his experience in closing these particular loans. Commercial real estate brokers are a good source for referrals.

3. Failing to negotiate deal points in the loan-quote letter.

A lender will generally issue a loan-quote letter, which contains all the key aspects of the loan being offered. This is the point in the process to make sure you understand everything in the quote and that any issues are cleared up before proceeding. Once the letter is signed and deposits are made, it will be too late to renegotiate. This is also the point at which you want an experienced attorney involved in the process.

4. Not anticipating the lenders underwriting adjustments.

Many borrowers are surprised and often disappointed when a lender or loan broker calculates the maximum debt a self-storage business can support at a dollar amount lower than expected. Lenders can and do make adjustments to effective gross income and operating expenses before determining the amount they will lend on your business. The rationale behind this is if they have to take over the property in a default proceeding, they want to ensure they can duplicate operating results until they are able to resell the property. The categories lenders most commonly adjust are vacancy, operating expenses, management fees and reserves. Being aware of these adjustments will prevent you from being disappointed or surprised as you go through the refinancing process.

If you own a facility fortunate enough to be above 95 percent occupied, theres a good chance you will not get credit for your occupancy in the lenders valuation analysis unless he can substantiate it by looking at occupancy across the market. Some lenders use a minimum vacancy of 10 percent or the actual vacancy, whichever is greater. The net effect of this adjustment will be to lower your NOI, which will translate to a lower-than-expected loan amount.

The adjustments lenders make to operating expenses are geared toward making them reflect what they might expect if they had to take over the facility and run it themselves. For example, if you have been running your facility at an operating cost of only 20 percent due to lack of payroll, advertising expenditures or third-party management fees, the lender will add these line items into your profit-and-loss statement during the underwriting and loan-sizing process. The net effect reduces your NOI, which in turn reduces your value and, consequently, the amount you can borrow.

The same type of adjustments to operating expenses will be made for reserves for repairs and maintenance. The amount of the reserve is generally determined by an engineering inspection and is based on what the inspector claims is necessary to maintain the property in top condition.

5. Not using an experienced self-storage mortgage broker.

The last of the common mistakes owners make when refinancing is not using an experienced self-storage mortgage broker. Brokers have many lender contacts that know and understand the business. These connections allow them to offer clients a large assortment of loan products geared toward their needs. Because brokers do volume business with lenders, they are also able to get favorable pricing, which is passed on to the borrower. Using a broker can save money, time and headaches during the process.

Whether you are refinancing for the first time or contemplating a refinance for the future, it is important to understand the alternatives and pitfalls involved. If you do your homework and use the expertise of others, you will find the process successful and stress-free.

Bill Walton is a CPA and a vice president of S & W Capital and Realty LLC. He specializes in arranging financing for owners in the self-storage industry. For more information, call 704.371.4275; e-mail [email protected].

Some salespeople think if they are persuasive and persistent enough, they can get people to give in and buy. But fact of the matter is you cannot sell anyone anything. People make up their own minds. You can put your offer in front of them. You can rattle off features and benefits. You can make it easy to buy. You can even tailor your offering to market research. But when you get to the point of decision, it is the prospect who makes the call. However, you can help him talk himself into the sale. How? Ask the right questions and have confidence in your offer.

The right questions help the prospect sort out all the things to consider and emerge with solutions to problems that involve your service or product. They make it plain to your prospect that buying what you offer is a good idea. Confidence in your offering suggests you have had many happy customers. It tells people you believe your product is a good value for the money. Finally, it means you are not afraid to ask for the business or to approach people who are not yet ready to buy.

Ask Away

Good salespeople ask an initial set of qualifying questions. The answers can tell you where your prospect is in the buying process, what his expectations and requirements are, and what sort of experience he has had with your industry in the past. The next set of questions helps the prospect visualize using your product or service and experiencing the pleasures of ownership.

The right questions help the prospect determine how your offering can be used and how he will see benefit and value. There is an old sales adage that says, If the salesperson says it, it might be hogwash. If the prospect says it, it must be truth. If you tell your prospect he will be happy storing his belongings at your facility, he might not believe you. But if, after some good questions, he tells you he will be satisfied with your service, he will believe it.

One of the most powerful questions to ask is, If you picture putting your belongings in our 10-by-10 or 10-by-15, which one do you think would work better for you? Now, this question involves some setup so it sounds natural and helpful. Many sales closings have been lost by those who didnt use the right line of questioning or wait for the right time to ask. If you master the use of this question, it can be very effective. But remember not to shoot until you see the whites of their eyes.

Close With Confidence

Confidence in your offering comes into play as soon as someone asks, How much is a storage unit? This question translated into real language means Please tell me the value of your facility. If you hesitate when giving the price or sound remotely apologetic, your prospect will get spooked and run. When he responds to your price with a grumble, he is seeing if you think the price is too high. Most people have no idea what storage costs. The best way for a customer to determine if you are overpriced is to suggest that you are and then gauge your reaction. If you are not confident, you will not get the rental.

If the prospect sees that your pricing doesnt make you flinch or quiver, he is likely to agree with it. Use positive phrasing, such as, Our 10-by-10 is only $167, which is a really good rate for the area. This tells your prospect you know prices in the market and yours is not too high for the value. It goes a long way in allowing him to sell himself on your store.

Confidence is also important when explaining your sites features. If you dont express pride in your security and convenience measures, prospects will not realize what makes your facility special. You need them to understand your value and how you differ from competitors. You want them to think, Well, it sounds like this place has got everything I might need, and the rent isnt too bad, either. After that, its easy for them to conclude, Ah, I might as well just rent here.

Dont sell. Be aware of your prospects thought processes. Help them talk themselves into renting from you. Ask good questions and have confidence in your store. Then simply ask, Which day would you like to move in? Good luck and good selling.

Tron Jordheim is the director of PhoneSmart, which serves the self-storage industry as an off-site sales force that turns missed calls into rentals. This rollover-call service serves as a backup to store managers. Mr. Jordheim has started several successful businesses from scratch and assisted with acquisitions as general manager of the Mid-Missouri Culligan Bottled Water franchise. For more information call 866.639.1715;
e-mail [email protected].